[REDACTED TEXT (b4), (b7D)] we ought to be looking at different submarkets than simply the snack
food
industry. In their view, consumers go into a store with tortilla chips on their list, not salty snacks.
Therefore, we ought to be looking at relevant markets that consist only of potato chips or only of
corn chips and tortilla chips, or only of popcorn, or only of pretzels.

Market Share

[REDACTED TEXT (b4), (b7D)]

Business Mix

[REDACTED TEXT (b4), (b7D)]

Distribution

[REDACTED TEXT (b4), (b7D)]
uses independent distributors for the most part. These distributors take title to the
product and are responsible for stocking the shelves of the various retail outlets in which the
product
is sold. Ten percent of [REDACTED TEXT (b4),(b7D)] distributors are company-owned. Depending on the geography,
account, and distributor, the majority of [REDACTED TEXT (b4),(b7D)] accounts have relationships with [REDACTED TEXT (b4),(b7D)]

Page(s) 4

Exempt
under b7D

[REDACTED TEXT (b7D)]

Competitors

[REDACTED TEXT (b7D)]

Product Promotion

We wanted the interviewees to address the issue of product promotion. In answering our
question, it appeared useful from the standpoint of the [REDACTED TEXT (b7D)] representatives that they give
us a history of the industry. Therefore, they went back to approximately 1987/1988 when the
cola wars were taking place. The cola wars were a series of marketing efforts by Coke and
Pepsi which resulted in a price war for the shelf space in supermarkets. As a consequence,
supermarkets began to think that they could extract fees from manufacturers for shelf space
outside of the Coke and Pepsi realm. Then, in the late 1980's, Eagle Foods came in and began
buying shelf space as a way of
acquiring market share. Once Eagle started paying for shelf space, Frito-Lay started matching
or
beating Eagle's offers. Retailers began to realize how much more profitable the snack food
business could be if they charge for shelf space on top of the margin that they were getting for
the product itself.

Bad Acts

According to the people from [REDACTED TEXT (b4),(b7D)] Frito-Lay's approach to the snack food business is
as follows: "Our business is up and we need more space, therefore we will give you (retailer)
$1,000 a foot plus the following promotions." Because of its strong market share, Frito-Lay
knows that one foot of space for its products will generate at least $12,000 in gross sales. And
even if the retailer is not willing to sell the space to Frito-Lay, this retailer now has a sense of
what the space is worth for purposes of negotiating/extracting fees from Frito's competitors.
Eagle [REDACTED TEXT (b4),(b7D)]
will only generate
[REDACTED TEXT (b4),(b7D)]
worth of sales for the same foot of space because Frito Lay 's consumer franchise is so large. For Frito-Lay, $1,000 for space is 7 percent of its sales.
[REDACTED TEXT (b4),(b7D)]
Frito's pitch is
profitable for the retailer and they are very likely to accept the offer.
According to [REDACTED TEXT (b4),(b7D)] once
Frito
gets 80 percent of the space, then the payments stop and the prices to consumers go up. The
people
from [REDACTED TEXT (b4),(b7D)] encouraged us to look at the situation in Texas and in California. Their view is
that we will find that retailers are unable to extract space fees, or at least the fees are much lower
and the promotions are much less significant, if in existence at all. Before the cola wars of the
late 80s, space in a retail outlet was based upon market share only. However, by aggressively
promoting
potato chips, Frito-Lay has taken all the profit out of the business and it has been subsidizing its
potato chip business with monopoly profits from the tortilla chips and the corn chips.

We asked [REDACTED TEXT (b7D)] why Frito-Lay would take this position with the potato
chip market. They
answered that Frito-Lay knows that Eagle [REDACTED TEXT (b7D)] and the others are basically potato chip
companies. Their sales are coming primarily from potato chips. If Frito-Lay prices its potato chips
below cost, then it could drive the competitors out and raise prices across the board.

1) Grocery Stores

We tried to get a sense from [REDACTED TEXT (b7D)] as to how much Frito-Lay is paying for space in retail
outlets or how much retail outlets are seeking to extract. Their suggestion was to ask the retailers
to describe the program that Frito offers. They say that these programs are called "CMA," which
stands for consumer merchandising agreement. These CMAs can include any number of features
that Frito would ask for in exchange for an upfront payment and help with certain promotions. For
example, in one instance, Frito might say "we want four more feet of space in exchange for which
we will give you an upfront payment, an automatic bill back of everything that you sell above
certain quota, guaranteed buy one get one free promotion, a pot of money to promote the product,
and a certain number of end caps (which are also referred to as EAMs meaning end aisle
merchandising, which is the most valuable space in the store), single serve racks, exclusive spots
at the check-out stand, and bread tables."

[REDACTED TEXT (b7D)] claims that it cannot afford to match these kinds of payments and
promotional payment
packages which are required to get into and grow in the grocery business. Fortunately, the "up and
down the street stores" do not require these kinds of packages. On the other hand, [REDACTED TEXT] realizes that
in order to survive, it has to be in the grocery business where it would not have a presence and it
wouldn't do any good that the up and down the street stores do not charge or demand payments
that the grocery stores do. So, what [REDACTED TEXT] does is negotiate with the grocery retailers for
pieces of the same package that Frito offers to the retailer as a package.

We asked about the category managers. The category manager, according to [REDACTED TEXT] is a
person
who is schooled or trained in a particular category of food in a grocery store. They either
advise or
supervise the buyers of product. They too had heard that some of these category managers
are
employed by Frito-Lay and conceded that to their knowledge the presence of Frito-Lay
employees
was not inherently bad. Indeed, if they had the money, they would be happy to put someone
in the
store because they could see the advantage, but they did feel that it was something that came
with
high market share which Frito definitely has.

Club Stores,

We asked [REDACTED TEXT] about other programs that Frito has with retail outlets. They described
for us the growth programs and have described these as fairly successful. For example, a number
of years ago, Frito introduced a program to get into the club store business, which includes such
retail outlets as Wal-Mart and Sam's Club. Apparently, what Frito-Lay did was offer a
pre-established discount that has been maintained for the last two or three years, where a
consumer can get two bags for $3. Elsewhere today, those bags are priced at considerably more
than $1.50 a piece.

Convenience Stores

We also wanted to hear from [REDACTED TEXT (b7D)] about what convenience stores they had been forced
to exit or to cut back because apparently Frito has a very strong program going to get exclusivity
in the convenience stores. According to [REDACTED TEXT (b7D)] Frito goes to the convenience store and says
"we can improve your profits and simplify your life if we can be your exclusive supplier, and we
will pay you for that privilege." As a consequence of this program, [REDACTED TEXT (b7D)] lost access
to [REDACTED TEXT (b7D)]
could have offered to pay for
exclusivity, but Frito-Lay's strength with consumers is so much greater that even if
[REDACTED TEXT (b7D)]
payment were equal, the convenience store would still go with Frito-Lay. [REDACTED TEXT (b7D)]
has not gone back to
the [REDACTED TEXT (b7D)] that it was kicked out of because it does not have the resources. Apparently, the
convenience store trade is not very profitable for the distributor, so [REDACTED TEXT (b7D)] using as it does independent
distributors, has a difficult time convincing them to service the convenience stores as
compared to the grocery stores where an hour's worth of work can generate [REDACTED TEXT (b7D)]
worth of sales as
compared to [REDACTED TEXT (b7D)] in a convenience store.

We asked whether the [REDACTED TEXT (b7D)] people could think of any advantages for the convenience
that would come with exclusivity to one snack food supplier. Although they did not expand on
this, they thought that convenience stores which is thinly staffed might prefer having only one
truck stop to deliver, service the product and only one invoice to deal with.

Finally, we got one
anecdotal piece of evidence regarding a convenience store where [REDACTED TEXT (b7D)]
is
currently fighting to stay in and is therefore unwilling to give us the name.
[REDACTED TEXT (b7D)]

Up and Down the Street Stores

We asked whether they had ever heard the phrase "UDS." Their response was that it might
refer to the up and down the street stores.
[REDACTED TEXT (b5)]
According to [REDACTED TEXT (b7D)]
it makes more gross profit (which
means revenue, less manufacturing cost before the marketing expenses) per pound in grocery stores,
but the trade discounts knock the gross profit down, as compared to the UDS stores, where the gross
profits are lower, but there are no trade discounts. That means that while the UDS stores are more
time consuming to service, the profits overall are higher.